Wrapped Bitcoin’s Supply Has More Than Doubled, but BadgerDAO Hack Exposed Risks of Moving Bitcoin to Ethereum

Higher returns usually come with higher risks.

Dec 6, 2021
CoinDesk Insights

Last week’s hack on decentralized finance (DeFi) protocol BadgerDAO put a major but less talked-about cryptocurrency in the spotlight once again.

Wrapped bitcoin, an ERC-20 token on the Ethereum blockchain that is collateralized 1-to-1 with bitcoin, has more than doubled its supply from a year ago, as traders and investors seek alternative high-yield opportunities in DeFi.

The rapidly growing demand for WBTC comes as yields for bitcoin borrowing and lending have grown less competitive compared with the lucrative DeFi lending market. But the hack on BadgerDAO, which focuses on high yields on wrapped bitcoin, has raised concerns around the security of moving bitcoin to the Ethereum blockchain. The hack led to the loss of 2,100 bitcoins at an estimated value of $118 million, China-based blockchain security and data analytics firm PeckShield wrote in a Dec. 2 tweet.

According to data compiled by user @Messari_Jack on Dune Analytics, the total supply of WBTC was roughly 253,876 on Dec. 1, up from 112,948 at the end of 2020. The top WBTC merchants for minting WBTC include Alameda Research, CoinList, Grapefruit Trading and Three Arrows Capital. Alameda alone has minted more than 9,6547.2 WBTC.

The total value locked in WBTC stands at roughly $12.53 billion, the fifth-largest DeFi protocol by TVL, according to DeFi Llama. TVL represents the dollar value of all tokens locked in the smart contracts of a decentralized lending project.

“It turns out that it’s currently easier to borrow and lend with WBTC than BTC since users can interact with DeFi lending protocols like Compound, Aave and Maker to lend their WBTC and borrow USDC, dai, or other assets against it,” Joe Keefer, a trader at Grapefruit Trading, one of the biggest WBTC merchants, told CoinDesk on Telegram. “There are also many opportunities to use WBTC directly in yield farming.”

On centralized lending platforms such as BlockFi and Celsius, the interest rate for bitcoin borrowing was as high as 6.20% at the time of publication, far lower than the rates from the lucrative yield farming on DeFi protocols using different trading strategies.

Instead of going to a centralized lending platform, traders can, for example, use WBTC as collateral on the MakerDAO platform to mint Maker’s own stablecoin, dai. The WBTC-generated dai could be used for many purposes, including lending dai at interest, as CoinDesk has reported.

“The yields on bitcoin are very low,” Dan Burke, managing director for institutional sales at crypto custody company BitGo, told CoinDesk via a direct message. With WBTC, “you can put it into any Ethereum-based DeFi pool or DEX [decentralized exchange].”

However, greater rewards often come with greater risks as the BadgerDAO exploit showed.

According to BadgerDAO’s official website, the protocol offers its users several automated strategies to earn yield on bitcoin-pegged assets, including WBTC and its own interest-bearing bitcoin (ibBTC).

Crypto lender Celsius Network confirmed that it lost money from the hack without disclosing the exact value of the loss. By tracking blockchain data, some observers estimated Celsius’ loss at roughly $51 million via WBTC, but Celsius CEO Alex Mashinsky said in a YouTube livestream that the lost funds belonged to the company and that no users had lost money from the hack.

“It was a Badger hack, but some of the Celsius funds were there, so Celsius lost money,” Mashinsky said. “But none of the Celsius members lost money.”

DISCLOSURE

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Muyao is a reporter on the markets team. She is based in Brooklyn, New York. She owns a marginal amount of bitcoin.